If something needs fixed the owner has to do it. And like the bank, you also have the right to take the property back through foreclosure in the event of non-payment. If this happens you can then sell the property for cash or take back another note.

Of course most note investors would rather just earn their yield and have the note payoff as scheduled (or better yet, early)! After 25+ years of buying and selling seller financed notes there have been both wins and losses. If you are getting started here are my…

21 Tips for Investing In Real Estate Notes

#1 – Learn From Others

There is no reason to reinvent the wheel. Learn and network with other investors to find the opportunity and minimize the risk.

#3 – Know Your Type

What is your risk tolerance? Are you investing with Vegas money or grocery money? For slow and steady think 1st position performing notes on residential properties with good equity. Higher risks deals (low equity, 2nd liens, and Non Performing or NPNs) come with more headaches and volatility so be sure to get compensated accordingly.

#4 – First Refer A Deal

Before investing your own funds get some hands-on experience. Start by referring a deal to another note buyer and earn a referral fee. Once you understand the process then consider note investing for your own portfolio or with retirement funds.

#5 – Discover The Why

Get direct with the note holder to find out why the note is being sold. Does the seller need the money for another investment? Are their financial challenges? Is there a certain sum that will solve the seller’s needs or wants? Understanding the why will provide insights valuable to both deal structuring and due diligence.

#6 – Talk to The Payer

Go beyond the basic estoppel and actually talk to the person making the payments each month. You will be surprised the things you will learn. They might be in the process of refinancing (think early payoff), just lost their job (better rethink that ITV), or stopped making payments a year ago (funny the seller didn’t mention that). Better to know the good and the bad before writing that check.

#7 – Verify Everything

Some sellers lie. Sometimes it’s on purpose, sometimes it’s by omission, and other times they just don’t know the facts themselves. Make it a practice to verify everything – taxes, insurance, payment history, property value, and terms to name a few.

#8 – Embrace The Boring

Due diligence can seem tedious and mundane. So can brushing and flossing every day. But we do it anyways. Why? Because it is essential to good health and preventing bad breath. Establish a transaction checklist and follow routine due diligence procedures to ensure a healthy investment (and to avoid the deals that stink)!

#9 – Plan for The Worse

If the note stops paying you get to take the property back. Of course it takes time and money to initiate foreclosure and there is inevitably some fix-up or back taxes. There are no TARP funds for private investors. Be sure to keep the Investment-to-Value (ITV) at a level that allows you to get out whole at the end of the day.

#10 – Partials Are Your Friend

You don’t need to buy all the payments remaining on a note. Partial note purchases can be both the safest and most profitable transactions.

#11 – Master The Time Value of Money

Learn how to run a financial calculator. Understand the 5 keys to cash flow calculations and how to structure deals to increase yield and ROI.

#12 – Encourage Early Payoffs

When you buy notes at a discount an early payoff can mean increased yields. Take a solid 10% return and turn it into a 20% return by incentivizing the payer. We’ve used discounted payoffs, lower interest rates, and even a TV to encourage the payer to accelerate the amortization.

#13 – Originals Count

Get the original promissory note. Have the original note endorsed at closing and keep it in a safe place. If the seller is not the original note holder be sure there are endorsements that follow the chain of title. You will want this if you ever need to enforce your lien position or prove holder in due course status.

#14 – Stay In Control

Nobody minds your money like you do. If you (or an entity you control) hold ownership of the note you ultimately call the shots. If you invest in a third-party managed fund that then invests in a note realize you just lost control. You are now investing in that entity with your investment fate in their hands.

#15 – Seek Professional Help

Get title insurance and use the closing services of an attorney or qualified escrow agent. Seek advice from competent legal, tax, and financial advisors. If creating new notes, work with an MLO experienced in seller financing.

#16 – Use Solid Servicing Procedures

Track the payments each month including interest and principal applications. Act quickly to start collection efforts when payments are missed. Check to be sure real estate taxes and property insurance are paid when due. Use the services of a servicing professional whenever possible. It’s easy to get busy and let too much time pass before taking action.

#17 – Understand When Laws Apply

There are laws that may or may not apply to note transactions. It can depend on how the note was created, the state, and/or the number transacted each year. Do your homework on the Dodd Frank Act, Safe Act, RESPA, Fair Credit Act, SEC, and others to determine whether or not they apply and how to comply when necessary.

#18 – Get Self-Directed

Would you like that note deal supersized? Using a self-directed retirement account let’s you make note investments tax deferred or even tax-free in the case of a Roth IRA. The alphabet soup doesn’t stop there – HSA, SEP, Solo 401K, SIMPLE, and Coverdell ESA are all self-directed options in addition to the Traditional and Roth IRAs.

#19 – Spread The Risk

It is better to buy five notes for $50,000 each than one for $250,000. In addition to spreading the risk among several deals, smaller balance notes often provide greater opportunities for increased yields.

#20 – Know When To Fold

Once upon a time I bought a mortgage note without proof of property insurance on the collateral. It had been in place then lapsed the day of closing. Rather than pull funds or delay closing we finalized the deal. The house burned down over the weekend. While “Burn to Learn” makes for an entertaining story I should have played that hand differently.

#21 – Be Creative

To find value where others overlook you need to get a little creative. You can buy a 4% face rate note and still yield double digits. The seller that won’t take a discount might consider a split funding or 50/50 partial. Realize that most seller financed notes fall outside of some conventional lender’s strict guidelines. You will need to think outside the box to minimize risk, secure a good return, and still create a win-win situation with the seller.

Now what? First, download the 5 Ways to Cash In On Real Estate Notes. It’s free and provides real life examples of transactions. Second, read through the archived articles here on the Note Investor blog (also free). Popular categories include: